Oil: A High-Stakes Game of Chance

Popular wisdom has it that the only certainty in life is death and taxes. Until a few short months ago, most economists, politicians, political pundits and journalists would have added to that short list a perpetual increase in the price of oil. But, in today’s interconnected world, much can happen to a global commodity like oil within the period of a few months.

A generally lethargic global economy, a hedged bet by OPEC (the intergovernmental Organization of the Petroleum Exporting Countries) as well as an upswing in production of unconventional oil in America’s shale oil fields have all contributed to a significant oversupply of crude in the global market, resulting in a substantial decrease in the price of the world economy’s hydrocarbon lifeblood. The consequence: global oil prices have fallen by upwards of 50 per cent.

Rapidly descending oil prices have undoubtedly been a boon for motorists and should also serve as a form of stimulus for the global economy that is still recovering from the financial downturn that began in 2008. At the most basic level of pocketbook analysis, lower crude oil prices encourage greater consumption and therefore help to stimulate the global economy. Lower prices put extra income in consumers’ pockets, income that can be spent on purchases and services which might not otherwise be consumed. But the current sliding oil prices are also a boon for oil-dependent industries. For instance, lower prices increase the sales of automobiles although, to the dismay of many environmentalists, they typically spur the sale of less fuel-frugal vehicles. Lower oil prices reduce the operating costs of airlines and other transportation-centric industries, in a perfect world, should translate into lower consumer prices for the products being transported. However, as we all know, does not always happen.

Other beneficiaries of today’s lower oil prices are the countries requiring imported oil to subsist. Unfortunately countries, like the consumers who inhabit them, are more likely to spend rather than save the extra money that, in the past, would have been earmarked to cover transportation costs. To claim otherwise would be mere wishful thinking.

But, if the current slackening of global oil prices constitute a boon for individual consumers and oil importing countries, they are a bane for oil producing and exporting countries. Since Canada is a net energy exporter, this means that the slump in oil prices will directly affect the Canadian economy. While Canada’s oilsands will undoubtedly be negatively impacted by the sudden sharp decrease in the global price of oil, the jury still remains out on how adverse that impact will be. A continuing slide in prices could render numerous projected oilsands extraction projects economically untenable, thereby reducing the amount of capital investment in Canada’s energy sector. Furthermore, on a broader level, the decline in oil prices could increase Canada’s trade deficit and substantially reduce previously predicted budget surpluses based on a higher international price of oil. And here is where both OPEC and the American shale oil industries come back into the picture.

Typically, when global oil prices slide, OPEC makes the conscious decision to bolster the price by reducing the amount of crude that its members pump into the world’s oil market. Because of OPEC’s dominant position in the area of oil production, this has the effect of controlling fluctuations and ultimately stabilizing the global market price of oil. However, in an unforeseen turn of events, OPEC has not indicated that it will pursue its usual price-bolstering strategy. Instead, its member states will refrain from curtailing oil production in an effort to prop up the sliding price of oil. It appears OPEC will not put the brakes on the global slide in the price of crude.

Many economists are speculating that this uncharacteristic action is aimed at undercutting the United States’ burgeoning shale oil industry. In other words, the hand that OPEC appears to be playing is to let the global price slip below a point where most of America’s lucrative (and rapidly expanding) shale oil projects cannot break even with the cost of exploration, extraction, transportation, and refining. If the global price of oil is below the American shale oil industry’s break-even price, investment in American shale oil will dry up. Existing firms will have to take on more debt to cover their costs when the commodity itself is worth less with each passing day.

The trump card OPEC seems to be counting on is this: the lower global oil price could limit future investment in America’s shale oil deposits thereby making that industry uneconomic. Prodigal investors and consumers would go back to OPEC’s own traditional light sweet crude. But why take the risk?

With the advent of recent advancements in extraction engineering procedures, America’s oil production has risen to approximately 9 million barrels per day. That tally is uncomfortably close to Saudi Arabia’s—OPEC’s most lucrative and productive member—daily output. In fact, there is now only about a million barrels separating the American daily output from that of Saudi Arabia. The American oil industry is nipping at the heels of the longstanding reigning champion in oil production and that reigning champion is taking evasive action to curtail the growth of its new and vigorous competitor. Before OPEC and the American oil industry finally turn over their cards (and the price of oil eventually stabilizes), Canada’s oil industry could become collateral damage in what increasingly appears to be a high-stakes game of chance. But no matter what the outcome, until then, consumers will smile all the way to the pump.